Instead, Would you bet on a financial product and aim for the most returns? Or would you instead tell a corporate’s finances? This is a dilemma that many young professionals face when entering the world of finance.
Today, we will explore the difference between corporate finance and investment banking. They are the two fields of finance that are often confused. We’ll be breaking down the specifics of each field and what it takes to excel in each.
Get ready for a crash course in corporate finance vs investment banking. Let’s get started!
Table of Contents
Corporate Finance vs Investment Banking: An Overview
Corporate finance is a particular area of finance. It deals with the financial decisions of individual firms and governments. Corporate finance deals with a variety of topics, such as:
- capital structure
- applied corporate finance
- capital budgeting
- capital raising
- cost of capital
- corporate valuation
- mergers and acquisitions
While investment banking is a form of banking, it assists and advises companies and governments in raising funds in the capital markets. They also guide mergers and acquisitions.
Investment banking can involve:
- underwriting
- mergers and acquisitions
- trading securities
- and asset management
Both corporate finance and investment banking overlap in areas. But each has a distinct function. Corporate finance deals with decisions and tactics to maximize a firm’s profits. Meanwhile, investment banking deals with the actual implementation of these strategies.
What Are the Similarities?
Corporate finance and Investment banking have some key similarities. They both involve companies and money. Moreover, both help the company grow and prosper.
In particular, both can tell on strategy and help raise capital. They also provide financial analysis and financial management services. They both work with institutions that will provide the necessary capital and manage investment portfolios for a company.
What Are the Main Differences?
Corporate finance and investment banking are different fields with distinct goals and activities. Below are some of the primary differences between the two.
Scope and Focus
The scope and focus are different for each. The core activities of corporate finance include:
- corporate strategy
- treasury
- capital raising
- financial planning and analysis
But investment banking focuses on capital raising from both debt and equity markets. It also covers corporate restructuring and mergers and acquisitions.
Key Functions
Corporate finance focuses on financial decision-making for companies. This involves the following:
- raising money
- valuing companies
- setting strategy
The decision stands on gearing towards company performance and capitalizing on opportunities. Investment banking focuses on providing expertise to other companies. Investment banking also includes advice on structuring financial instruments.
Clientele and Stakeholders
Corporate finance clientele and stakeholders are business owners and executives. They usually take a longer-term view of their finances.
In contrast, investment banking clientele and stakeholders often involve institutional investors. They may take a more short-term or opportunistic view of their capital allocation decisions. Each plays a vital role in helping corporations and investors make good decisions.
Risk and Return
When it comes to risk and return, the two disciplines are related to each other. Corporate finance can help analyze the risks associated with a particular investment. They then suggest strategies for mitigating those risks.
Investment banks can act as intermediaries between corporations and investors. They offer financial services such as advice on raising funds and managing investment portfolios.
Decisions made in either area need to be made considering risk and return. This is to maximize profit and cut losses.
Compensation and Incentives
Compensation and incentives systems can vary between the two. Generally, corporate finance employees receive fixed salaries from their employers.
Meanwhile, investment bankers are compensated via bonus systems. These systems are usually performance-based.
Corporate finance employees can expect a steady yearly salary. Investment bankers’ yearly bonuses can vary according to their client’s successes.
Incentives for corporate finance staff can be either fixed or based on performance. But they may be less frequent than those for investment bankers. Investment bankers often receive share or cash bonuses.
Regulatory Landscape
Regulations must be followed in both sectors. This is to maintain fairness and transparency in the market. On the corporate finance side, regulations may include:
- Sarbanes-Oxley Act
- Dodd-Frank Wall Street Reform
- Consumer Protection Act
They are in place to address corporate governance and the actions of management. This is while ensuring that financial records are accurate and reliable.
On the investment banking side, regulations include:
- U.S. Securities Act of 1933
- Securities Exchange Act of 1934
They are in place to ensure that securities trading is fair and orderly. They also ensure that investors are provided with all the necessary information.
Generally, the Uniform Commercial Code or UCC governs all commercial transactions in the US. To learn more about UCC filing, you can read about UCC financing statements.
Career Paths and Growth Opportunities
Corporate finance offers a strong base for professional development and growth. It provides the potential for increased responsibilities within the finance department.
In contrast, investment banking offers a higher potential for a larger salary. It also provides more diverse opportunities to work on special projects. Additionally, employees can consult with companies on strategic deals.
Both career paths can offer different opportunities for individuals to grow and excel. This depends on the individual’s preference for job security or high profits.
How to Start a Career in Corporate Finance or Investment Banking
A relevant degree and professional certifications are necessary to start a career in either field. You will also need strong skills in:
- analytical
- communication
- research
Knowing the differences between the two banking roles can help aspiring finance students select the best career path.
Learn More About the Two Fields
Differences exist between corporate finance vs investment banking. Even so, the two are entwined. Corporate finance focuses on creating value for the company. Meanwhile, investment banking focuses on bringing that value to the market.
To succeed in either field, understanding the other is essential. Contact your local business school for more information if you want to jumpstart your career in either area.
Want to learn more financial tips? Please keep reading our other articles.